How much and how do I pay for a business?

Valuation of a business

Start by requesting a sales memorandum. This contains detailed business information, including the price and how it was determined.

The price is based on the seller’s assets. There are tangible and intangible assets.

Tangible assets:

• property
• inventory
• stock
• cash

The intangible assets consist of goodwill. This is the surplus value of a company over the value of its assets and liabilities (visible equity). For example, name recognition, the location, the existing customer base, the relationship with suppliers. Determining the goodwill of a company is often a complicated issue.

There are 2 types of goodwill:

• Company goodwill: this is goodwill of a bakery with special bread, for example. There is also corporate goodwill if the company has a good organisation or very customer-friendly staff and makes structurally more profit.
• Personal goodwill: this is goodwill of the entrepreneur himself. For example, a chiropodist with a special treatment technique or a hairdresser who turns every haircut into something unique.

Only corporate goodwill affects the value a company. This is because the value is increased by, for example, the name, products, any patents, and special recipes. As successor, you naturally want to continue the business with the same special bread, so you have to pay for that. With personal goodwill, the situation is different. It remains to be seen whether you, the buyer of the business, have the same qualities as the selling entrepreneur. So this does not affect the price. To determine the goodwill, get advice from a specialist, such as an accountant or financial adviser.

The valuation of a business is experienced from 2 sides. The seller sees in value a compensation for past labour and money. You, the buyer, see in value a compensation for profits in the future.

How to get financing

As a buyer, you have several options to finance the business acquisition. Do not let the asking price put you off at first. Even with little money of your own, there are possibilities to finance the takeover. Also, the asking price is usually not the price you end up paying.

Personal capital

Your own money can include savings, money from family and/or friends who want to co-finance, and a subordinated loan. A subordinated loan is a money loan from the seller or acquaintance that you repay under (suspensive) conditions.

External financing

There are many financing options that the buyer of a business can explore. In recent years, there has been a shift towards a mix of financing options. For example, an acquisition where a third of the acquisition sum is financed by you, a third by the bank, and a third by the seller is not unusual. This is one of the examples of gradual acquisition.

Draw up a financial plan

By creating a well-founded financial plan with your financing application, you as the buyer will demonstrate the feasibility of the acquisition. Lenders want to see a promising and reliable plan. If your purchase is less certain, it creates increased risk for the lender. Increased risk means more interest. That risk makes it attractive for certain lenders to set their own terms. Think of shares, profit shares, and control instead of interest.

Find out all about external financing at the KVK Financing Desk.

Video Starting by taking over a business

Watch this video if you are starting by taking over a business (English subtitles are available).